British Airways and Spanish carrier Iberia merged Thursday, creating one of the world's largest airline groups.

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A British Airways Boeing 747 taxis away from Heathrow airport in 2009. The British carrier merged with Spanish flier Iberia on Thursday. ((Mark Lennihan/Asociated Press))

The deal, expected to close by the end of 2010 pending regulatory and shareholder approval on both sides, would create the sixth largest airline group in the world, with a combined 408 aircraft flying to 200 destinations and carrying more than 58 million passengers each year.

"The merged company will provide customers with a larger combined network," British Airways CEO Willie Walsh said.

The deal is expected to save the airlines $530 million a year by the fifth year of the merger. Customers, shareholders and employees will all benefit, and both airlines will continue to fly under their current brands, Walsh said.

The announcement of a firm deal comes as loss-making BA fights an acrimonious battle over pay and working conditions with its 13,000 cabin crew. Staff went on strike twice for a total of 10 days last month, costing the airline more than $60 million.

Like other airlines, both BA and Iberia have been hit by a downturn in passenger demand since the global credit squeeze, and they acknowledge that more consolidation of the industry is likely.

Further airline consolidation

In the United States, reports Thursday suggested United Airline and US Airways are in talks about a similar pact to create the second-largest U.S. airline.

The pact would be modeled on the Delta-Northwest merger, which came into being in January, a person familiar with the deal who did not want to be named because of the sensitive nature of the talks told the Associated Press Thursday.

The Delta-Northwest deal, which made Delta the largest U.S. airline by 2009 passenger traffic, was an all-stock transaction in which Northwest shareholders were given Delta shares and no cash component.

The CEOs of both US Airways and United have been outspoken in the past about their willingness to be involved in some type of merger. United chairman and CEO Glenn Tilton and US Airways chairman and CEO Doug Parker were both involved when their companies talked about combining in 2008.

They walked away that time, citing high fuel prices, but didn't rule out a future deal. That same year, Continental Airlines Inc. rejected United's attempt at a merger.

"We don't comment on rumours or speculation," United spokeswoman Jean Medina said. "We've been consistent on our position on consolidation generally for several years, and that position is well known."  

US Airways spokesman Jim Olson also said the airline doesn't comment on rumours.

Integrating their unionized work forces would be one of the most difficult tasks if they got together. The person who spoke to AP said the companies have a plan for dealing with that issue.

US Airways, which is based in Tempe, Ariz., still runs separate pilot and flight attendant groups after it was bought in 2005 by America West. Its pilots formed their own union after leaving the Air Line Pilots Association, the union that represents United aviators.

Executives at Delta and Northwest put their deal on hold in early 2008 so their pilots could work out an agreement on combining their ranks.